Kochs and Other Madoff Investors Are Winners in Fight Over Profits Held Abroad

Image

David Koch at a gala in 2015. CreditKrista Schlueter for The New York Times

By Randall Smith

Nov. 22, 2016

The company led by the American billionaire Koch brothers, along with dozens of banks and fund managers, kept billions of dollars in profit from Bernard L. Madoff’s Ponzi scheme in accounts offshore. As it turns out, that was a good decision.

Koch Industries and others who invested in the Madoff fund from offshore accounts won a key ruling in federal bankruptcy court on Monday, when the judge said certain funds held abroad — estimated at about $2 billion — could not be made available to victims of the Madoff scheme.

The ruling highlights the tug-of-war that has been raging between those who lost money when the scheme fell apart eight years ago and those who walked away before the fraud came to light, having recouped their original investments and then some.

Irving H. Picard, the trustee appointed to recover money for the victims, had argued that he should get the money because the investors used so-called feeder funds that operated in the United States even though they were registered offshore. Those funds gathered investor money on behalf of Mr. Madoff. But Judge Stuart M. Bernstein of Federal Bankruptcy Court in Manhattan said foreign bankruptcy proceedings blocked the trustee from accessing the money.

A spokeswoman for the trustee, Amanda Remus, said the decision by Judge Bernstein was “under review,” but added she could not comment on next steps. The decision can be appealed to the Federal District Court.

Mr. Picard is still trying to recover more than $5 billion for victims. So far, according to his website, he has obtained $11.5 billion for about $17.5 billion in claims.

Among the largest recoveries have been $5 billion from the estate of the Florida investor Jeffry Picower, $1 billion from Tremont Group, $550 million from the investor Carl J. Shapiro and others, and $470 million from Union Bancaire Privee, a Swiss bank that ran a Madoff fund.

Koch Industries is one of 88 cases in which management, service providers and investors received overseas transfers of money. They have been fighting Mr. Picard’s attempts to recover the money, arguing that it was transferred from these overseas accounts to banks and others outside the United States before the fund collapsed.

Koch Industries began investing in the Madoff fund well before its collapse and pulled its $21.5 million out in 2005. The money withdrawn from the Madoff fund went to a fund registered in the British Virgin Islands and then to a Koch entity in Britain.

In addition to Koch Industries, several European banks were listed in court papers as having had Madoff money offshore, including HSBC Bank of London, UBS AG and Credit Suisse of Switzerland, an international arm of Merrill Lynch and the French money manager Natixis.

Collectively, the institutions represent “a ‘Who’s Who’ of the European investing class,” said Jonathan Sablone, an attorney from the firm Nixon Peabody in New York. The presence of Koch, based in Wichita, Kan., gives the issue “a political tone,” he added. Its main owners, the brothers Charles G. and David H. Koch, are known for supporting Republican political candidates and right-of-center causes.

Mr. Picard sued Koch Industries in February 2012, arguing that the money ultimately went back to Koch’s parent company.

Asked about the case in June, a Koch Industries spokesman, Rob Carlton, said in a statement: “The Koch entity involved made an investment in an entirely separate fund. That Koch entity no longer exists and its investment was redeemed in 2005, long before anyone knew of Madoff’s fraud.” Asked for comment about Monday’s ruling, Mr. Carlton declined to comment.

In Monday’s ruling, Judge Bernstein noted that two key funds in the case are being shut down, and the people engaged in that overseas process are trying to go after the same assets being pursued by Mr. Picard.

Although Koch’s name appeared in the Madoff court record as early as 2012, its involvement was not publicly revealed until June 3, when its role in the cases was reported by Bloomberg News.

Mr. Picard has noted that the Madoff fund transferred $3 billion to Fairfield Sentry in the six years before the fraud came to light in December 2008, with $1.6 billion of that total withdrawn in the two years before December 2008, and $1.1 billion transferred just 90 days before that same date.

A July 2014 decision by Judge Jed S. Rakoff of the Federal District Court in Manhattan blocked clawbacks of feeder-fund transactions outside the United States between foreign parties, in this case money that went from the Madoff firm to foreign funds and then to other investors outside the United States.

But in subsequent bankruptcy court filings and arguments, Mr. Picard has said the funds were really in the United States and should thus be fair game. Both main funds at issue “did business in New York, almost all their employees were in New York, they listed New York as their primary place of business, and they dealt with their shareholders from New York,” lawyers for Mr. Picard said in a filing on June 27, 2015.

Mr. Madoff, who in March 2009 pleaded guilty to 11 felonies including securities fraud, is serving a 150-year sentence in federal prison in North Carolina.

Correction:

An article on Wednesday about a federal judge’s ruling that money invested in the Bernard Madoff fund from offshore accounts could not be made available to victims of the Madoff scheme misstated, in one instance and in some copies, when a judge made the ruling. It was Monday, not Tuesday.

A version of this article appears in print on , on Page A1 of the New York edition with the headline: Koch Brothers Are Winners in Fight Over Madoff Riches. Order Reprints | Today’s Paper | Subscribe